This progressive blog sets forth the personal views of the Dean of the Massachusetts School of Law on national events. Occasionally, the responses to his views or other interesting articles are also posted.

Tuesday, March 30, 2010

The Foreign And Domestic Indirects.

March 30, 2010

The Foreign And Domestic Indirects.

The Trustee has moved for a hearing on who is a customer. In his Motion he said he had denied about 8,500 claims of people who did not have an account with Madoff in their own names (i.e., were indirects in one way or another) and that about 2,000 objections had been filed to his denials. In an exhibit listing “Confidential Claimant Notice Parties” that accompanied the Motion he provided a list of accounts involved (apparently ones as to which objections were filed to his denials). There are 49 pages of accounts, each page but the last has over 50 accounts listed, and in total there are about 2,600 accounts listed. (These accounts must cover investors through hedge funds, banks, partnerships, etc.)

Next to those accounts which are foreign, the Trustee has put down the nation from which the accounts came. I have counted the foreign accounts only once, and probably made a few mistakes in counting, but have not bothered to recount because the mistakes are necessarily small and, due to the sheer magnitude of the numbers, do not matter with regard to the overall points I wish to make.

First, here are the relevant numbers with regard to accounts and countries.

This kind of information is very vital to American victims of Madoff for a whole variety of reasons. Like most information of great importance to victims, the Trustee does not (and did not) release it, no matter how crucial it is to victims, until for some (here indecipherable) reason he thinks it in his interest to do so. Victims are the losers, as inevitably must be the intent, or at least an intent, behind keeping the information secret until the Trustee sees some advantage to his side in releasing it.

Here are some of the reasons why the question of the total number of indirects, and of foreign indirects, is important.

To begin with, the higher the number and percentage of indirects relative to directs, the less the Trustee is obligated to pay in toto under current law and, correlatively, the more financially capable is the Trustee of paying the directs. This bears on the accuracy of what surely was the Trustee’s and SIPC’s initial theory, in late 2008 and early 2009, that they must use cash-in/cash-out in order to avoid paying directs at all, or in order to pay them far less, lest use of final statements drive SIPC into bankruptcy. It now appears likely, and various parties on our side believe, that use of the final statements received by directs will not drive SIPC into bankruptcy, and the higher the number and percentage of indirects vis a vis directs, the more true this is likely to be.

The situation could alter if Congress, which is or will be considering various relevant bills, chooses to provide for indirects as well as directs, a result many are working for and which may or may not be accompanied by provisions for payment. But right now the situation (if memory serves) is that over 40 percent of claims are indirects currently ineligible for SIPC payments, over three out of every four indirects are not contesting their ineligibility in court, and, very roughly speaking therefore, something over 30 percent of victims are not seeking SIPC payments. This would make it easier for SIPC to pay victimized direct investors under the final statement method were it, or the courts, disposed to follow the law.

A related possibility -- and one on which the Trustee has of course provided no information whatever -- is that indirects in general, and foreign indirects in particular, had (by far?) the lion’s share of the money in Madoff, both over many years and at the end. It is known that the hedge funds, banks, etc., that invested with Madoff each put in huge sums -- up to hundreds of millions of dollars or more each. As well, Harry Markopolos has opined that there were about 340 hedge funds and about 60 asset managers that invested with Madoff. Picard’s exhibit shows that about 2,600 indirects are contesting denials of their claims to be customers. If each of these indirects averaged only ten million dollars of investment -- which would be peanuts for hedge funds and asset managers -- that would amount to $26 billion dollars, or even more than the Trustee says was the sum of cash-in on December 11th. If each showed only 25 million dollars on its final statement, that would be $78 billion, or more than the Trustee says the final statements show in toto. If what apparently are a total of 8,500 indirects each invested an average of $5 million, that would be a total of $42.5 billion of cash-in, and, if their final statements showed $8 million on average, that would total $68 billion.

These kinds of possible numbers make it evident that it is essential to obtain the truth from the Trustee -- to obtain accurate numbers from him -- if victims, courts, Congress, or anyone else outside of the Trustee’s office and SIPC is to be able to assess the truth about SIPC’s ability to pay. My hypothesized numbers may be wrong in various respects -- certain of them must be wrong -- but they make clear the necessity of compelling the Trustee to disclose the accurate numbers.

Currently, as indicated, we cannot know the truth of these matters, because the Trustee is keeping all the relevant information secret and the Bankruptcy Court was obviously disposed not to allow discovery on these important topics or to itself require the Trustee to provide evidence that would prove or disprove anything the Trustee said. The Bankruptcy Court, rather, wanted to accept the supposed validity of the Trustee’s unsupported assertions. Nonetheless, there can be little doubt that hundreds or thousands of directs were only a small part of Madoff’s supposed fund: there can be little doubt that many of the people who are among those suffering most -- small people who invested directly with Madoff for 20, 30 or 40 years and are now wiped out -- were only a small part of the overall financial picture. (The only other people suffering as much are equally small indirects who are mixed in with the royalty and rich of the indirects.)

Then there is the question of foreign indirects, a question on which the information provided by the Trustee is pretty minimal. All the Trustee has given us is the number of foreign indirects that are challenging his denials of claims. We do not know how much money they invested (their cash-in) nor how much their final statements showed. Nor do we know how many foreign indirects are not challenging the denial of claims, nor how much money is involved in those claims by way of cash-in or final statements. But there are some informed speculations that can be made. Unless Harry Markopolos is all wrong, big money and lots of it came from foreign sources. Much was from royalty, and part of it was hot money of one kind and another. Frankly, it wouldn’t surprise me a bit if half or more of the money invested in Madoff came from foreign sources as indirects.

The amount that was indirect money from foreigners is relevant because, once again, if it is a high percentage of the whole, then it would be easier for SIPC to pay domestic directs if it or the courts were to choose to follow the law. It might also be easier for Congress to provide for domestic indirects if, as could well be true, they are relatively small potatoes next to the foreign indirects. But, again, we cannot know the numbers actually involved because Picard is not releasing the information.

There are two other points arising from the fact that a goodly percentage of the money invested in Madoff came from foreign sources. One is that foreigners will resist clawbacks by simply ignoring Picard and the American courts. Something very analogous to this happened in the Stanford case, and here, as there, it will cause Americans to unfairly be the only nationality widely subject to clawbacks.

Indeed, one would bet it likely that lots of the wealthy foreign indirects and their funds and banks -- like domestic ones too -- pulled out their money in 2007 and 2008 because of losses elsewhere, and yet Picard has given no sign I know of that he will go after any of these groups for clawbacks, despite their failure, before investing in the first place, to exercise the due diligence of which they were financially and professionally capable but which they ignored. So both groups -- both the large domestic and foreign indirects (and their funds, asset managers and banks) who did not do the due diligence they were capable of and which would have exploded Madoff years and years ago, and who pulled out their monies in 2007 and 2008 -- are the real net winners, not the middle class Americans who have lost everything but whom Picard and SIPC almost slanderously term net winners. And the foreign net winners will also be armored by nationality against clawbacks, which Picard has shown no sign of seeking from them in any event.

In addition, it is virtually a sure thing that powerful foreign interests will make it clear to our State Department, Treasury Department and White House that recompense for Madoff’s fraud is demanded by foreign nationals, and that there will at minimum be lawsuits in international tribunals if the foreign demands are not met. Unless I miss my guess, it would appear that representatives of foreign interests have already had some conversations with relevant American officials about this (e.g., conversations with Geithner and/or his staff, I believe (but cannot know for certain).) The end result could well be that wealthy foreigners -- royalty and foreign Mafiosi from various countries, for example -- will obtain recompense through international arrangements or tribunals for Madoff’s fraud while middle class Americans who lack political clout are left to twist in the wind.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, you can, if you wish, email me at Velvel@VelvelOnNationalAffairs.com.

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About Dean Velvel

Name:Lawrence
Velvel

Location:Andover, Massachusetts,
United States

Dean Velvel, an honors graduate of
the University of Michigan Law School, has practiced law in the public and private sectors,
and been a law professor. He is the author of the quartet Thine Alabaster Cities
Gleam. The books in the quartet are entitled: Misfits In America, Trail of
Tears, The Hopes and Fears of Future Years: Loss and Creation, and The Hopes
and Fears of Future Years: Defeat and Victory.

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